E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                  A N D   P E N S I O N   L A W
                Vol. 2,  No. 19: October 18, 2001
_________________________________________________________________

Publisher:     LSN Subject Matter Journals
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Editor:        PAMELA J. PERUN
               Urban Institute
               Mailto:pamela@planetnow.com

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                      Topic of This Issue:
                      Public Pension Plans
   ___________________________________________________________
 

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T A B L E   of   C O N T E N T S
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NEW and FORTHCOMING ARTICLES

"Of What Value are Shareholder Proposals Sponsored by Public
 Pension Funds?"
      The Journal of Business, April 2000
     ANDREW K. PREVOST
        Concordia University
        Department of Finance
     RAMESH P. RAO
        Texas Tech University
        College of Business Administration
 

"Investment Practices of State and Local Pension Funds:
 Implications for Social Security Reform"
      PENSIONS IN THE PUBLIC SECTOR, Olivia S. Mitchell and Edwin
      C. Hustead, Eds., Pension Research Council & University of
      Pennsylvania Press, 2001
     ANNIKA E. SUNDEN
        Boston College
        Center for Retirement Research
     ALICIA H. MUNNELL
        Boston College
        Center for Retirement Research
 

"State and Local Retirement Plans: Innovation and Renovation"
      EBRI Issue Brief, Number 235
     DAVID RAJNES
        Employee Benefit Research Institute (EBRI)
 

"Public Pensions and the Uniform Management of Public Employee
 Retirement Systems Act"
      Rutgers Law Review, Vol. 51, p. 141, 1998
     STEVEN L. WILLBORN
        University of Nebraska-Lincoln
        College of Law

WORKING PAPERS

"Public Pension Fund Activism and Firm Performance"
     SUNIL WAHAL
        Emory University
        Department of Finance
 

"Institutional Investor Activism: Follow the Leaders?"
     CATHERINE M. DAILY
        Purdue University
     JONATHAN L. JOHNSON
        University of Arkansas
        College of Business Administration
     ALAN E. ELLSTRAND
        California State University at Long Beach
     DAN R. DALTON
        Indiana University
        Kelley School of Business - Indianapolis
 

"Public Sector Pension Governance and Performance"
     OLIVIA S. MITCHELL
        University of Pennsylvania, Wharton School
        National Bureau of Economic Research (NBER)
     PING LUNG HSIN
        Cornell University
        School of Industrial and Labor Relations
 

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 Download papers directly from the included web address or contact
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EDITORIAL POLICIES
 To provide the broadest coverage of research in Employee
 Benefits, Compensation and Pension Law we do not referee working
 papers. We accept abstracts of working papers in Employee
 Benefits, Compensation and Pension Law whose topics suit the
 coverage of the journal and which are part of the worldwide
 scholarly discourse.
 

N E W   and   F O R T H C O M I N G   Articles
_________________________________________________________________

"Of What Value are Shareholder Proposals Sponsored by Public
 Pension Funds?"
      The Journal of Business, April 2000

      BY:  ANDREW K. PREVOST
              Concordia University
              Department of Finance
           RAMESH P. RAO
              Texas Tech University
              College of Business Administration

 Contact:  ANDREW K. PREVOST
   Email:  Mailto:aprevost@vax2.concordia.ca
  Postal:  Concordia University
           Department of Finance
           1455 de Maisonneuve Blvd W.
           Montreal,  Quebec, H3G 1M8   CANADA
   Phone:  (514) 848-4128
     Fax:  (514) 848-4500
 Co-Auth:  RAMESH P. RAO
   Email:  Mailto:odrao@coba.ttu.edu
  Postal:  Texas Tech University
           College of Business Administration
           Lubbock, TX 79409  USA

ABSTRACT:
 This study addresses the empirical question, "Of what value are
 shareholder proposals sponsored by public pension funds?" and
 finds that the primary function of a proposal is to act as a
 signaling mechanism in alerting the market that management is
 unwilling or unable to negotiate a settlement with the public
 fund in order to prevent the submission of the proposal. The
 sample selection process allows the study to isolate a clean,
 uncontaminated sample of firms targeted by public funds. Firms
 receiving proposals for the first time experience a transitory
 decrease in shareholder wealth, while firms that are targeted
 repeatedly exhibit negative wealth effects over much wider event
 windows. These results are robust to both parametric and
 non-parametric event study methodologies. Long run changes in
 the firms' operating performance and stock price returns are
 consistent with these results. Repeat target firms exhibit long
 run declining performance, while the one-time target firms
 exhibit positive (but insignificant) differences in performance.
 Comparison of corporate governance characteristics provides some
 insight into these differences.
 

JEL Classification: G34
______________________________

"Investment Practices of State and Local Pension Funds:
 Implications for Social Security Reform"
      PENSIONS IN THE PUBLIC SECTOR, Olivia S. Mitchell and Edwin
      C. Hustead, Eds., Pension Research Council & University of
      Pennsylvania Press, 2001

      BY:  ANNIKA E. SUNDEN
              Boston College
              Center for Retirement Research
           ALICIA H. MUNNELL
              Boston College
              Center for Retirement Research

 Contact:  ANNIKA E. SUNDEN
   Email:  Mailto:annika.sunden.1@bc.edu
  Postal:  Boston College
           Center for Retirement Research
           Fulton Hall 550
           Chestnut Hill, MA 02467-3808  USA
   Phone:  617-552-1459
     Fax:  617-552-1750
 Co-Auth:  ALICIA H. MUNNELL
   Email:  Mailto:alicia.munnell.1@bc.edu
  Postal:  Boston College
           Center for Retirement Research
           Fulton Hall 550
           Chestnut Hill, MA 02467-3808  USA

ABSTRACT:
 The investment practices of public pension funds have become a
 topic of major interest in the wake of President Clinton's 1999
 proposal to invest a portion of the Social Security Trust Funds
 in equities. Both supporters and opponents of the proposal point
 to the performance of public plans to argue their case.
 Supporters cite the success of Federal plans, particularly the
 Federal Thrift Savings Plan (TSP), which has avoided picking
 individual stocks by investing in a stock index and has steered
 clear of projects with less than market returns. Divestiture of
 stocks for social or political reasons has also not been a
 problem, and TSP has avoided government intervention in the
 private sector since individual portfolio managers vote the
 proxies. Opponents of Social Security Trust Fund investment in
 equities point to state and local pension funds. They contend
 that state and local pensions often undertake investments that
 sacrifice return to achieve political or social goals, divest
 stocks to demonstrate that they do not support some perceived
 immoral or unethical behavior, and intervene in corporate
 activity. Opponents claim that if Social Security's investment
 options were broadened, Congress would use the Trust Fund money
 for similar unproductive activities. An important question is
 the extent to which allegations about state and local plans are
 true.

 This study explores four possible avenues through which social
 or political considerations could enter the investment decisions
 of state and local pension funds. The first section focuses on
 economically targeted investments (ETIs), those investments that
 are designed to meet some special need within the state. The
 second section looks at instances of pension fund activism,
 whereby the fund managers attempt to influence corporate
 behavior to improve profitability or other aspects of corporate
 performance. The third section investigates the extent to which
 state and local pension plans have avoided or divested certain
 holdings in order to make a political or ethical statement. The
 fourth section investigates the extent to which states and
 localities have used pension funds as an escape valve for
 general budget pressures.

 This comprehensive review yields the following conclusions.
 First, economically targeted investments account for no more
 than 2.5 percent of total state and local holdings. Although
 early studies showed plans sacrificing considerable return for
 targeting their investments to in-state activities, recent
 survey data reveal no adverse impact on returns as a result of
 the current small amount of ETI activity. Second, public plans
 in only three states have seriously engaged in shareholder
 activism, and this activism appears to have been motivated by a
 desire to improve the bottom line not to make a political
 statement. The literature suggests that this activity has had a
 negligible to positive impact on returns. Third, the only
 significant divestiture that has occurred was related to
 companies doing business in South Africa before 1994. This was a
 unique situation where worldwide consensus among industrial
 nations led to a global ban on investment in that country. With
 respect to tobacco, public plans have generally resisted
 divestiture, and only a few have actually sold their stock.
 Finally, state and local governments have borrowed occasionally
 from their pension funds or reduced their contributions in the
 wake of budget pressures, but this activity has been restrained
 by the courts and frequently reversed. In short, the story that
 emerges at the state and local level is that while in the early
 1980s some public plans sacrificed returns for social
 considerations, plan managers have become much more
 sophisticated. Today, public plans appear to be performing as
 well as private plans.
 

JEL Classification: H70, H55
______________________________

"State and Local Retirement Plans: Innovation and Renovation"
      EBRI Issue Brief, Number 235

      BY:  DAVID RAJNES
              Employee Benefit Research Institute (EBRI)

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=277574

 Contact:  DAVID RAJNES
   Email:  Mailto:rajnes@ebri.org
  Postal:  Employee Benefit Research Institute (EBRI)
           Suite 600
           2121 K Street, NW
           Washington, DC 20037-1896  USA
   Phone:  202-775-6329
     Fax:  202-775-6312

Paper Requests:
 Contact Alicia Willis at Mailto:willis@ebri.org, or 2121 K St.,
 NW, Suite 600, Washington, DC 20037-1896. Phone:(202)775-9132,
 Fax:(202)775-6312. Full-Text downloads are available from SSRN
 Online for $7.50.

ABSTRACT:
 This report examines how state and local government retirement
 plans have developed and continue to evolve in a number of
 areas, including plan features, regulatory framework,
 governance, and asset management. More than 16 million
 individuals are employed by state and local jurisdictions in the
 United States. Systems range in size from small entities at the
 local level to large state operations that include prominent
 institutional investors in financial markets. These plans
 comprise a significant part of the total U.S. retirement market
 and held $2.7 trillion in assets in 1998.

 The report explores how state and local plans differ from
 private-sector plans. Because of their rather unique historical
 and legal traditions, state and local retirement plans share
 certain common features. They differ on many levels from plans
 operating in the private sector. Specifically, a combined
 federal-state regulatory framework has encouraged certain plan
 design features, unavailable in the private sector, which
 include multiple tiers for successive generations of employees
 in a single plan and different strategies to increase
 portability. On the other hand, there is considerable diversity
 among state and local plans, which the report also addresses.
 Moreover, the increasing role taken by the federal government in
 public-sector pension system design and operation has led to
 greater complexity in such areas as Social Security
 participation and deferred compensation arrangements. Recent
 passage of the Economic Growth and Tax Relief Reconciliation Act
 of 2001 can be expected to increase this complexity.

 Finally, the report discusses the investment performance of
 state and local pension retirement systems. This has improved
 markedly in recent decades, owing to a combination of good
 economic conditions, a relaxation of investment restrictions,
 and sound portfolio management. A major consequence of the
 steady increase in state and local assets has been a
 corresponding rise in funding ratios, which has benefited plan
 sponsors, participants, and retirees. Improved funding has led
 to plan changes and new programs described in the report.

 Keywords: Employment-based benefits, Public employees,
 Retirement plans
 

JEL Classification: H7
______________________________

"Public Pensions and the Uniform Management of Public Employee
 Retirement Systems Act"
      Rutgers Law Review, Vol. 51, p. 141, 1998

      BY:  STEVEN L. WILLBORN
              University of Nebraska-Lincoln
              College of Law

 Contact:  STEVEN L. WILLBORN
   Email:  Mailto:swillborn1@unl.edu
  Postal:  University of Nebraska-Lincoln
           College of Law
           103 McCollum Hall
           P.O. Box 830902
           Lincoln, NE 68583-0902  USA
   Phone:  402-472-1256

ABSTRACT:
 The Uniform Management of Public Employee Retirement Systems Act
 is a recent product of the National Conference of Commissioners
 on Uniform State Laws. Approved by the Commissioners in 1997,
 the Act provides uniform rules in two important areas: the
 standards of fiduciary conduct and the disclosure obligations of
 public pension funds. In the former area, the Act provides a
 clear statement of the standards of fiduciary conduct and, in so
 doing, permits and encourages public pension systems to engage
 in modern investment practices. On disclosure, the Act provides
 broad obligations intended to provide rich and detailed
 information to those with an interest in monitoring public
 pension systems. In this article, Professor Willborn introduces
 the Act to the academic and general legal communities by
 providing a careful analysis of the provisions of the Act. These
 provisions are often complex because public pension systems
 themselves are complex organizations that call for sophisticated
 regulation.

______________________________

W O R K I N G   P A P E R   Abstracts
_________________________________________________________________

"Public Pension Fund Activism and Firm Performance"

      BY:  SUNIL WAHAL
              Emory University
              Department of Finance

    Date:  November 1994

 Contact:  SUNIL WAHAL
   Email:  Mailto:sunil_wahal@bus.emory.edu
  Postal:  Emory University
           Department of Finance
           1300 Clifton Road
           Atlanta, GA 30322-2710  USA
   Phone:  404-727-8685
     Fax:  404-727-5238

ABSTRACT:
 This paper studies the efficacy of pension fund activism and the
 ability or willingness of these funds to vote with their feet. I
 examine all firms targeted by nine major funds over a seven year
 period (1987-1993). Targeting announcements are associated with
 a small but significant wealth effect for a subset of firms.
 However, there is no evidence of improvement in the long-term
 stock price performance of targeted firms. In fact, performance
 continues to decline even three years after targeting. Moreover,
 in contrast to other institutions, pension funds do not appear
 to significantly reduce their holdings in underperforming firms
 in general, or in firms that they target. Collectively, the
 results cast doubt on the effectiveness of public pension fund
 activism as a substitute for an active market for corporate
 control.
 

JEL Classification: G30, G23
______________________________

"Institutional Investor Activism: Follow the Leaders?"

      BY:  CATHERINE M. DAILY
              Purdue University
           JONATHAN L. JOHNSON
              University of Arkansas
              College of Business Administration
           ALAN E. ELLSTRAND
              California State University at Long Beach
           DAN R. DALTON
              Indiana University
              Kelley School of Business - Indianapolis

    Date:  October 1996

 Contact:  CATHERINE M. DAILY
   Email:  Mailto:daily@mgmt.purdue.edu
  Postal:  Purdue University
           West Lafayette, IN 47907  USA
   Phone:  317-494-4415
     Fax:  317-494-0818
 Co-Auth:  JONATHAN L. JOHNSON
   Email:  Mailto:jonjohn@comp.uark.edu
  Postal:  University of Arkansas
           College of Business Administration
           Fayetteville, AR 72701  USA
 Co-Auth:  ALAN E. ELLSTRAND
   Email:  Mailto:aellstra@csulb.edu
  Postal:  California State University at Long Beach
           Long Beach, CA 90064  USA
 Co-Auth:  DAN R. DALTON
   Email:  Mailto:dalton@indiana.edu
  Postal:  Indiana University
           Kelley School of Business - Indianapolis
           801 W. Michigan Street
           Indianapolis, IN 46202-5150  USA

ABSTRACT:
 Michael Jensen of the Harvard Business School, recently quoted
 in The Wall Street Journal, noted that "institutional activism
 is never going to amount to anything." A sharply contrasting
 view is evident from Fortune which held that the power of such
 groups "will be one of the most important business forces of the
 nineties." This apparent difference of opinion would appear to
 matter: Institutional investors, primarily private and public
 pension funds, currently control more than 50 percent of
 corporate equity. Certain activist institutions have been
 successful in changing some aspect of target corporations.
 Examples would include insisting on boards of directors with
 more outside, independent directors, the elimination of some
 anti-takeover provisions, separation of the role of CEO from
 that of the chairperson of the board, and elements of executive
 compensation. While many of these changes were sought and
 attained by some activist institutions, the issue had remained
 unsettled whether such strategies result in bottom line
 financial performance of the institutions' equity holdings. In
 this study of 200 Fortune 500 companies, a total of 975 separate
 institutional investors were listed as holding stock in these
 200 firms. The thirty-six firms representing pension funds for
 city, state, and federal employees were classified as public.
 This is an important distinction as it is these public pension
 funds which have been the most activist of the institutional
 investors. Moreover, 13 institutional investors that sponsored
 or co-sponsored one or more shareholder proposals or proxy
 fights from 1986 to 1994 were identified, including California
 Public Employees Retirement System (CalPERS) fund, College
 Retirement Equities Fund (CREF), and New York State Common
 Retirement Fund. This, too, is an indication of institutional
 activism. The results of this study, relying on both accounting
 and market financial returns over a four-year period, indicate
 that, on average, firms with higher proportions of their equity
 held by institutional investors do not enjoy higher performance.
 Moreover, these is no evidence that the firms targeted by the
 activist funds through shareholder proposals or proxy fights
 were characterized by higher financial performance.
 

JEL Classification: G32, G34
______________________________

"Public Sector Pension Governance and Performance"

      BY:  OLIVIA S. MITCHELL
              University of Pennsylvania, Wharton School
              National Bureau of Economic Research (NBER)
           PING LUNG HSIN
              Cornell University
              School of Industrial and Labor Relations

Document:  Available from the SSRN Electronic Paper Collection:
           http://papers.ssrn.com/paper.taf?abstract_id=226950

Paper ID:  NBER Working Paper No. W4632
    Date:  January 1994

 Contact:  OLIVIA S. MITCHELL
   Email:  Mailto:mitchelo@wharton.upenn.edu
  Postal:  University of Pennsylvania, Wharton School
           Wharton Financial Institutions Center
           3641 Locust Walk
           Philadelphia, PA 19103  USA
   Phone:  (215) 898-0424
     Fax:  (215) 898-0310
 Co-Auth:  PING LUNG HSIN
   Email:  not available
  Postal:  Cornell University
           School of Industrial and Labor Relations
           Ithaca, NY 14853-3901  USA

Paper Requests:
 Full-Text downloads are available from SSRN Online for $5.

ABSTRACT:
 This paper investigates the determinants of public sector
 pension plan investment and funding behavior. Its goal is to
 draw lessons which may be used to improve the design and
 governance of public pensions. Plan performance is related to
 characteristics of the pension systems' governance structure and
 authority, using a new survey of U.S. state and local public
 pension plan governance practices and performance outcomes. The
 study suggests that most large public pension systems funded
 their plans satisfactorily in 1990, but some did not. Better
 public pension funding was associated with a pension system
 having in-house actuaries and when pension Board members were
 required to carry liability insurance. In contrast, public
 pension funding was lower when states experienced fiscal stress,
 and when employees were represented on the pension system Board.
 Pension funding did not appear sensitive to statutes
 guaranteeing benefits or funding levels, nor by the ability of
 states to carry budget deficits from one year to the next. The
 results also suggest that public pension Boards having more
 retiree-Trustees experienced lower investment returns, as did
 public sector pension plans required to devote a portion of
 their assets to in-state investments. Returns did not differ
 depending on whether a pension Board had in-house, or external
 money managers. No single set of pension plan management
 practices can optimize plan performance for all systems across
 all time periods. Nevertheless, these results suggest that care
 must be taken when designing the regulatory and investment
 environment in which these plans operate.